IIn her political career, Liz Truss has earned a reputation for U-turns. But even skeptics were surprised by the new prime minister’s recent ideological shift. Small country libertarian has just unveiled a massive energy relief package which will see the government enter the markets to cap household energy bills at £2,500 a year until 2024. Along with an additional six-month relief for business and the public sector, the estimated cost of the intervention could reach Up to £200 billion.
With the family price cap rising by 80% on October 1, a major intervention was needed. But not all large-scale interventions are created equal. The problem with this amount is not how much is spent, but where it is targeted and how it will be funded. Essentially, it’s a huge handout for companies that have taken advantage of the energy crisis, leaving workers to foot the bill. To make matters worse, it stimulates the production of costly fossil fuels, while only cheap renewable energy sources will help tackle the dual crisis of energy and climate.
To decipher the plan’s shortcomings, we need to start with a short detour into the somewhat ambiguous way energy prices are set. In the wholesale market, generators sell power to suppliers who in turn sell it to homes and businesses. The wholesale price is set competitively, but the retail price is subject to a cap set by the Office of Gas and Electricity Markets (Ofgem).
Cause a lot Energy suppliers go bankrupt In the early stages of this crisis, the reason was that Ofgem’s cap prevented them from passing on the rising cost of wholesale energy to retail customers. With the new plan, instead of letting suppliers lose out whenever wholesale prices exceed the retail cap, the government will compensate them for the difference. No matter how high wholesale prices rise above the cap – and could rise to a much higher level given geopolitical uncertainty – the government will pick up the check.
Truss plan effectively means that the government will guarantee the income of energy suppliers. The concern here is that the companies that dominate the sector do not need this support, And they don’t deserve it. As shown by Joseph Baines and Myriam Britt Find a Common Wealth Research CenterEnergy suppliers have raked in very high profits, and the amount they pay in taxes pales in comparison to the profits they pay to shareholders, many of whom are foreign governments. Supporting their income on this scale without attaching restrictions, such as the prohibition of dividend distribution, is indifferent.
The new prime minister has ruled out funding the relief package by imposing an unexpected tax on energy producers who have benefited most from the energy crisis. As the tax policies of Truss is It is expected to be very retrogradeThis means that the workers will end up bearing the cost.
Perhaps the most frustrating aspect of the package is that it does little to address the root cause of high energy prices. The government wants to double the natural gas by lifting the fracking ban and increasing offshore production in the North Sea. Not only is this a huge step backwards for the environment, it doesn’t make any economic sense either. Climate Change Committee Already warned Taking advantage of dwindling domestic gas reserves will have little impact on energy prices.
So how do we deal with rising energy prices? Through the rapid expansion of investments in renewable energy. With prices dropping sharply over the past decade, renewables are now Nine times cheaper than gas. Only by engaging in massive efforts to build wind and solar energy can we meaningfully address the dual crises of energy and climate.
The government has a plan for renewables: it want to encourage Special generators to switch to cheaper contracts that are not tied to the current wholesale energy price. In effect, this entails subsidizing renewable energy generators so that they will accept lower energy prices today in exchange for more stable revenue streams in the future. But these technical reforms will be voluntary and slow in effect, and it is estimated that they will, at best, get a better result modest effect on energy bills.
Although the support for private renewable energy companies is welcome, what we really need is a file General Energy Corporation, which will directly produce and generate cheap and abundant renewable energy. The main advantage of the generic alternative is that it will be in a better position to circumvent the absurdity of private wholesale markets where energy prices are determined by the last and most expensive unit of energy required to meet demand. Under the current system, themarginal price“Paid for high-cost gas generators dictates the price of all energy, including cheaper renewables. Unlike private renewables, a public provider will face no pressure to accept a set marginal price in private wholesale markets.
The public energy company will also avoid this Other costly and ineffective components for the current system. First, it would avoid expensive and messy measures to incentivize private renewable energy companies to increase their capacity. Second, it can ramp up investments by borrowing at much lower government rates than in private markets. And third, he won’t feel beholden to paying dividends, which funnel billions to shareholders.
Truss showed that even the most powerful market theorists can embrace big government. But there are better ways to intervene. Instead of throwing money at a broken private system, it’s time to invest in a public energy company that can power the country not only more safely and efficiently, but more equitably and sustainably.
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